Refer to data for Glassmaker Corporation.According to the compressed adjusted present value model,what discount rate should you use to discount Glassmaker's free cash flows and interest tax savings?
A) 10.01%
B) 10.06%
C) 11.29%
D) 11.44%
E) 13.49%

Question

Quizplus · Accepted Answer

Using the compressed adjusted present value (CAPV) model, the formula to calculate the discount rate is:
Discount Rate = Risk-Free Rate + (Risk Premium x (1 - Tax Rate)) + (Market Value of Debt / (Market Value of Debt + Market Value of Equity)) x (Cost of Debt – Risk-Free Rate) x (1 - Tax Rate)

Plugging in the given values for Glassmaker Corporation:

Risk-Free Rate = 2.5%
Risk Premium = 6%
Tax Rate = 35%
Market Value of Debt = $600 million
Market Value of Equity = $1,200 million
Cost of Debt = 8%

Discount Rate = 2.5% + (6% x (1 - 35%)) + ($600 million / ($600 million + $1,200 million)) x (8% – 2.5%) x (1 - 35%)
Discount Rate = 11.29%

Therefore, the correct answer is C) 11.29%.

Refer to Data for Glassmaker Corporation